troubled times how we got here, what may lie ahead and what we can do about it
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DESCRIPTIONTroubled Times How We Got Here, What May Lie Ahead and What We Can Do About It. Ned C. Hill National Advisory Council Professor of Finance Fellow, Wheatley Institution Marriott School of Management Brigham Young University March 2009. Outline. Prophetic warnings - PowerPoint PPT Presentation
Troubled TimesHow We Got Here, What May Lie Ahead and What We Can Do About ItNed C. HillNational Advisory Council Professor of FinanceFellow, Wheatley InstitutionMarriott School of ManagementBrigham Young UniversityMarch 2009
OutlineProphetic warningsSeeds of the economic crisis14 suggestions on how we might deal with the crisisManaging debtBuilding reserves for the futureProtecting your familyBuilding on what you have learned
We wish the presidencies of the stakes and the bishops of the wards to urge, earnestly and always upon the people, the paramount necessity of living righteously; of avoiding extravagance; of cultivating habits of thrift, economy, and industry; of living strictly within their incomes; and of laying aside something, however small the amount may be, for the times of greater stress that may come to us. By no other course will our people place themselves in that position of helpful usefulness to the world which the Lord intends we shall take.First Presidency, July 1933 Who Said This (and When)?
President Gordon B. Hinckley Priesthood Meeting, October 3rd, 1998Story of Pharaohs dream of the seven fat cattle and the seven lean cattleI want to make it very clear that I am not prophesying, that I am not predicting years of famine in the future. But I am suggesting that the time has come to get our houses in order. There is a portent of stormy weather ahead to which we had better give heed.So many of our people are living on the very edge of their incomes. In fact, some are living on borrowings.
President Gordon B. Hinckley (cont.)I urge you, brethren, to look to the condition of your finances.I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt to the extent possible.Pay off debt as quickly as you can, and free yourselves from bondage.Thats all I have to say about it, but I wish to say it with all the emphasis of which I am capable.
President Gordon B. Hinckley General Conference, October 7th, 2001 The economy is particularly vulnerable. We have been counseled again and again concerning self-reliance, concerning debt, concerning thrift. So many of our people are heavily in debt for things that are not entirely necessary. I urge you as members of this Church to get free of debt where possible and to have a little laid aside against a rainy day.
Elder Joseph B. WirthlinApril 2004 Remember this: debt is a form of bondage. It is a financial termite. When we make purchases on credit, they give us only an illusion of prosperity. We think we own things, but the reality is, our things own us.Some debtsuch as for a modest home, expenses for education, perhaps for a needed first carmay be necessary. But never should we enter into financial bondage through consumer debt without carefully weighing the costs.
Elder L. Tom Perry November 2008 We have been encouraged at almost every general conference of the Church I can remember not to live beyond our means. Our income should determine the kind of housing we can afford, not the neighbors big home across the street. President Heber J. Grant once said: From my earliest recollections, from the days of Brigham Young until now, I have listened to men standing in the pulpit urging the people not to run into debt; and I believe that the great majority of all our troubles today is caused through the failure to carry out that counsel. (in Conference Report, Oct. 1921, 3).
The Global Fixed-Rate Investment MarketWho Are These Investors? Insurance companies, individuals, pension funds, mutual funds, governments, investment funds, banks, municipalities, etc., etc.EnterNew-fangled Mortgages
Mortgages from Start to Finish
Factors Contributing to the Economic CrisisAccounting Rules
Then the Inevitable:The Housing Bubble BurstAugust 2007, housing prices began to slip in key markets like Phoenix, Las Vegas, California, Florida, etc.We had built 1M to 2M excess homes!The actual risk of mortgages began to emerge.No one wanted to buy mortgage-related toxic securities. Very difficult to value.Precipitous drop in the prices of these securitiesused to be AAA but now almost worthless.Accounting ruleswrite them down
We Cant Have Huge LossesWhat to Do?Close or sell the institutionBear Stearns (1923) sold 3/2008 to JPMorganChase for $10/sh (previous year was $133/sh) Countrywide Financial was bought by Bank of America (7/2008)IndyMac (Independent National Mortgage Corp.) seized (7/2008)Lehman Brothers (1850) sold to Barclays (9/2008) and Nomura Holdings (10/2008)Washington Mutual seized by FDIC, assets sold to JPMorganChaseFind a stronger institution to merge withMerrill Lynch merging with Bank of America (9/2008)Wachovia merging with Wells Fargo (10/2008)Infuse more capitalGovernment took over Freddie Mac and Fannie MaeGovernment is pumping $150B into AIG
ResultA Credit FreezeNo bank wanted to loan moneyeven overnightto another bank or anyone else. Theyre afraid the borrower might be next on the chopping block.The economy runs on crediteven healthy companies borrow frequently to meet short-term swings in cash flows.Consumer creditdropped through the floorWe ran the risk of seeing the entire economy shut down.We are connected to the rest of the global economy, tooIcelands major banks failBritish savers lose $8B Some European banks failingEtc., etc.
Government Bailout EffortsA Federal Reserve Bank infused massive amounts of cash into the banking system and is assisting in mergers, sales and rescues of troubled institutionsCongress passed Troubled Asset Relief Program (TARP)government authorized Treasury to use $350B (done) and $350B more (if authorized by Congress) to buy equity in troubled banks
Government Bailout EffortsBRecent stimulus package of $787B infuses money into states, federal agencies, consumers (through lower taxes), etc.Plans to aid homeowners in danger of foreclosure
What Are Possible Outcomes?Worst caseprolonged depression similar to the 1930s (25% unemployment, no growth for 3-5 years, great personal hardship)Best caseshort recession (unemployment 6-8%, no/slow growth for 12-18 months)Most likely caseserious recession (unemployment 7-10%, no/slow growth for 18 months to 2 years)
Other Outgrowths of the CrisisMore regulation of securities industryRestrictions on the mortgage/housing industryGovernment may make a good return on much of the bailout investments: buying toxic assets, buying stock in troubled institutions, etc.Eventually we will see higher taxes to pay for bailout. Inflation may be a problem in the recovery.Some businesses (even whole industries) will fail, stronger ones will eventually emerge.
How Individuals and Families Might Deal with the Crisis14 Suggestions
Net WorthHelps You Think About DebtNet worth = Assets - LiabilitiesAssetsMarket value (not purchase price)Real and financialLiabilitiesCredit card and other consumer debtMortgagesWhy do this?Net worth helps you do stuff in the futureTrack over time--should be growingIdentifies assets that could be used to reduce debt
Net WorthNet WorthA PictureAssetsLiabilities
Net WorthImpact of Credit Card PurchaseAssetsLiabilitiesCredit Card DebtStereo System
Net WorthImpact of Credit Card PurchaseAssetsLiabilitiesCredit Card DebtStereo SystemHow do you balance this?
Net WorthWhat Adds to Net Worth?AssetsLiabilitiesCredit Card DebtStereo SystemNet Worth Must Shrink!
Avoid Unproductive DebtIt Makes Net Worth Shrink Productive debtUnproductive debtHome
Most credit card debtSuggestion 1
Origin of Most Debt Problems?Spending ProblemsIncomeExpendituresDebt
Control Your SpendingStep 1: Track past cash flows1-3 months backFind all expendituresDetermine assets and liabilitiesStep 2: Agree on goalsWhat do we want to accomplish?Agree on a budget for future cash flowsStep 3: Track ongoing cash flows--compare budget to actualUse computer or any other methodStep 4: Review monthlyStep 5: Make adjustments
Why You Need a Spending PlanCommunicate with spouse and family Find out what you are spendingExtract more money for saving and investingGet out of debtPrepare for the futureKeep money from slipping through your fingers
Remember the Pioneer MottoUse it up, wear it out, make it do, or do without.Hugh Nibley story
Be Careful Where You Borrow!Finance companiesCredit cardsBanksCredit unionsSavings Pay-day lendersSuggestion 3
If You Have Debt, Reduce ItPlastic surgery Reduce spendingUse assets to pay off debtReduce interest rateCareful of home equity loans!Use another lower cost source of borrowingMake a plan -- stick to itTalk to a credit counselor if neededSuggestion 4
Protect Your Family with Life InsuranceTerm life -- pure death benefitNo savings componentAbout 1/10th the cost of wholeExpires at age 65 (usually)Whole life -- death benefit plus savingsBuilds cash valueDoes not expireLow but fixed rateUse for estate tax purposesSuggestion 5
Cash fromInsuranceAdded Net WorthNet WorthInsurance--Makes Up for Low Net Worth ProblemsIf you have low or negative net worth?Heirs may have difficultiesSevere cash flow problemsInsurance creates an instant estate--it becomes an asset if you dieAssetsLiabilities
What Kind and How Much?Term insurance (6-10 times annual income)Consider convertible termGroup is least costly but what if you leave?Have some for non-employed spouse
Prepare for RetirementYes, Even Wh